Burning Down The House

Chris Dudley took a large—and questionable—tax deduction.

A REAL BLAZER: Chris Dudley obtained a 2004 home appraisal six months after firefighters burned his house. IMAGE: Taylor Schefstrom

In 2004, Chris Dudley let the Lake Oswego Fire Department burn down his house for a training exercise and claimed a $350,000 tax deduction for the razed home.

What the Republican gubernatorial nominee did then is uncommon, but not unheard of. Fire officials in Portland and Lake Oswego say they each burn one or two homes annually at owners’ requests. That is valuable preparation for firefighters, and saves the homeowner demolition costs.

Scott Fisher, the Portland Fire & Rescue Bureau’s division chief for training, says homeowners are often “confused” about the value of their potential donation.

“I’ve had people tell me their house is worth $250,000,” Fisher says. “I tell them if they’ve decided to demolish it, it’s probably worth a whole lot less—if anything.”

It’s when the homeowner claims a tax deduction equal to the house’s fair market value that the Internal Revenue Service gets involved, recently disallowing other, very similar, tax deductions.

Dudley says the IRS has not contacted him and he took the deduction based on his accountant’s advice.

“We looked into it to make sure the deduction was legitimate and got a conservative appraisal,” he says.

In December 2002, during the last of his 16 NBA seasons, then-Portland Trail Blazer Dudley bought a 1.81-acre property in Lake Oswego for $1.15 million. The property included a 4,900-square-foot home with four bedrooms, four bathrooms and a four-car garage.

In 2004, Dudley approached the city’s fire department “requesting information on utilizing his house as a ‘Burn to Learn’ exercise.”

“The homeowner is planning to clear the property of this structure and rebuild with a new single-family residence,” wrote Lake Oswego Battalion Chief Brad Loehner in a May 17, 2004, memo.

The fire department conducted drills in the house for two days and then, on June 7, 2004, burned it down.

Dudley claimed a $350,000 deduction for the house on his 2004 federal tax return. He based the value on an appraisal he supplied to WW, which says its purpose was to “establish both the overall market value of the property, and the market value of the site.”

Given Dudley’s career NBA earnings of more than $30 million, he probably faced a combined federal and state income tax bill of 40 percent in 2004. That means the $350,000 deduction saved him about $140,000.

Recently, however, the IRS has rejected exactly the kind of deduction Dudley claimed. In two high-profile Ohio cases, one of which involved former Ohio State University quarterback Kirk Herbstreit, now an ESPN and ABC football analyst, homeowners claimed deductions for letting local firefighters torch their homes.

In Herbstreit’s case, court records show he claimed a $330,000 deduction in 2004. Another Columbus man, James Hendrix, claimed a $287,400 deduction the same year. The IRS later forced each man to repay the federal government the money they saved by claiming those deductions. The tab came to more than $100,000 for each.

Both then sued the IRS. The feds laid out their argument against the deductions in a Feb. 16, 2010, motion.

“The Internal Revenue Code generally precludes deductions for contributions of the right to use property,” wrote Department of Justice lawyer Alex Case. “They only contributed the right to use the…property for the purposes of training and only for a short duration of time. Neither the property nor the structure on it were actually contributed.”

In July, the feds won their case. They declined to comment on the Ohio ruling. Three law professors, however, say Dudley should be entitled to little or no deduction.

“At some level there could be a valid deduction, but nothing like $350,000,” says Scott Schumacher, who teaches tax law at the University of Washington. “You’re not giving the fire department the house so they can live in it or sell it.”

Ann Murphy, a former IRS lawyer who now teaches at Gonzaga Law School, says Dudley might be entitled to a deduction if the value of training the firefighters received exceeded the avoided demolition costs.

“You are not giving them the house,” Murphy says. “You’re giving them the ability to burn down the house. That is worth far less.”

Professor Steven Willis, who has taught tax law at the University of Florida for 30 years, is the most skeptical.

“There’s no way he should get a deduction,” Willis says. “By deciding to demolish the property, he’s saying he values it at nothing.”

Dudley’s aggressive approach to his taxes mirrors a decision he made during a 1993 through 1997 stint with the Trail Blazers (see “Straddling the Columbia”, WW, Sept. 8, 2010). In that case, after buying a home in Portland, registering to vote in Oregon, and obtaining a driver’s license here, he bought a home in Camas, Wash., and claimed Washington, which has no income tax, as his legal domicile.

Questions remain about that maneuver, including why Dudley never registered to vote in Washington or sold his Portland home until he left the Blazers.